CONDOS SAVED FROM RUIN
Allison Lampert (THE GAZETTE November 16, 2012)
One owner had travelled from British Columbia for the sole purpose of
voting on what would be a crucial decision for their downtown building.
The choices were grim.
Each owner would either have 45 days to pay a special repair bill of
about $100,000 per unit - more than a quarter of the value of most of
the condos - or risk his or her entire investment.
The 47-unit Château Nasso, which had received warnings since the 1990s
for failing to comply with the city of Montreal’s fire code, could lose
its insurance coverage.
“When I announced the voting results, that 95 per cent were in favour of
the work, people applauded,” recalled Michael Chetboun, one of the two
co-founders of Sequoia Gestion Immobilière who took over in 2010 as the
Sherbrooke St. W. building’s property managers. “There was a lot of
relief. Better this than losing everything.”
The neglect of crucial repairs that would have cost one-quarter of the
price in the early 2000s, and a lack of regulatory oversight, illustrate
many of the key problems now threatening the Canadian condo industry -
the fastest-growing sector of residential real estate in large cities
like Montreal and Toronto.
Aging condos, first built in the 1970s, are now in need of repair and
owners of old and even new buildings will have to be more vigilant in
Quebec where incidents of falling concrete slabs and crumbling
infrastructure prompted calls in 2010 for the Régie du bâtiment du
Québec to come up with specific rules governing building maintenance.
Yet across Canada, provincial laws governing condo maintenance have been
decried as woefully inadequate, or non-existent, opening the door to
possible fraudulent or incompetent managers, and placing key decisions
for buildings worth millions of dollars in the hands of
owner-volunteers.
“In the end, the whole system is relying on the good will of the
owners,” said Jean Lambert, president of the Chambre des notaires du
Québec.
Concerns over these condo law deficiencies have sparked reform efforts
nationally. In Quebec, Justice Minister Jean-Marc Fournier has announced
plans to revamp the province’s 43-year-old condo laws, which were last
reviewed in 1994.
“This is happening right across the country,” said Toronto attorney
Armand Conant who heads the condo department of Shibley Righton LLP.
“Provinces have either just revised their Condo Acts or are working on
them now.”
The timing is urgent. While new construction is expected to ease this
year and in 2013, the number of Quebec households living in condos is
still expected to swell to 266,000 by 2016, provincial data shows. And
according to the Association of Condominium Managers of Ontario, there
are at least 500,000 condo units in the province - with tens of
thousands of new ones now under construction in the Greater Toronto
Area.
When Chetboun and his partner, Benjamin Remia, were hired as general
property managers by the Château Nasso’s volunteer condo board, they
were struck by the extent of the problems. The marble floors of the
100-year-old building designed by the renowned Maxwell Brothers were
filthy; hallways appeared to be dimly lit because the light fixtures
hadn’t been dusted in years. Flies swarmed over piles of garbage that
were being improperly stored in the basement, while the building’s two
elevators would be shut for weeks on end because there was no money to
service them, Remia recalled.
Reports and repair plans paid for with owners’ fees were packed away in
dust-covered boxes.
Condo fees hadn’t been collected in months and the reserve fund was
depleted from paying for common services.
“It was complete mayhem. Since there were no funds, the board of
directors couldn’t get anything done.”
Yet the biggest challenge the property managers faced was getting
approval to fix the building, which was last renovated during the early
1980s when it was converted from rentals to condos.
“We have owners with a variety of opinions,” said resident Jean-François
Boily, 45, one of three condo board members who bought his
1,500-square-foot unit in 1994. “Some were completely against the work,
claiming it wasn’t necessary, whereas others were for doing part of the
work.”
He said the greatest support for the work came from Boily and the
minority of owners who actually lived at the Château Nasso, where most
of the units are rented out to students. Now, the original $1 million
repair estimate the co-owners received just over a decade ago has
quadrupled to $4.3 million.
“That’s the cost of procrastination,” Boily said.
To bring the building up to code, two small elevators would need to be
converted into a large one, while a new generator would have to be
installed on the roof.
The staircase, which was completely open, would have to be moved back,
with doors added at each landing so it would be self-contained to
prevent fire and smoke from spreading. Even more challenging, repair
work which got under way Tuesday, would have to go on with the residents
still in their homes, Remia said.
Instances of buildings needing such extensive repairs are becoming more
common in Montreal, real-estate observers say. Lawyers, notaries and
brokers interviewed for this article say it’s no longer exceptional for
owners in older buildings to be hit with five-and even six-figure repair
bills.
“Condos are like our roads, or any of our infrastructure,” observed Yves
Joli-Coeur, a lawyer specializing in condominium law at the Montreal
firm DeGrandpré Joli-Coeur.
“We don’t have enough money in our reserve funds to repair them. So like
our roads, it becomes like a time bomb.”
Broker Liza Kaufman said owning a condo is no different from owning a
house; maintenance and repairs are required costs.
“Why would someone assume that if they buy into the building, they won’t
have to put money into renovating the building, just as they would in
their own home?” asked Kaufman, partner with Sotheby’s International
Realty Québec. “It’s the timing. Maybe historically they (owners)
haven’t had to spend more, but now these buildings are aging. If you’re
moving into an older building, you’d better make sure that they’re
regularly maintained.”
Indeed, owners will face even greater responsibilities, with the Régie
du bâtiment poised to unveil specific new guidelines for building
maintenance this year. At the same time, in their March 2011 report, a
working group led by the Chambre des notaires called for clearer and
stricter condo maintenance laws that would oblige owners to put aside
more money for building upkeep.
Quebec law currently requires condo boards to maintain a reserve fund
for repairs worth at least five per cent of the operating budget used to
cover common services like day-to-day maintenance, and cleaning.
Instead, the working group - which includes notaries, real-estate
lawyers and municipal housing officials - has suggested raising the
reserve fund to one per cent of the building’s total value, while
obliging condo owners to keep a logbook proving that the building is
regularly maintained.
For buildings large enough to afford them, professional property
managers can act as a check and balance, providing crucial guidance to
inexperienced or busy board members. But there have also been cases of
managers stealing from clients or being simply incompetent.
Critics say that’s because property managers in Ontario and Quebec
aren’t required by law to obtain any minimum qualification or
government-issued licence to practise, even though they manage budgets
worth hundreds of thousands or even millions of dollars. They can choose
to join professional organizations that claim to promote their
industry’s best practices, but these are voluntary and not accountable
to the public.
“These organizations don’t replace having managers belong to a real
professional order,” Joli-Coeur said. “We shouldn’t give a false sense
of security to the public.”
Alleged fraud cases involving property managers have made headlines in
both provinces. In July, the board of directors for the Prince of Wales
V condos in Notre Dame de Grâce won a $26,000 judgment against former
property manager Jacques Paquet, along with his company Gestion
Immobilière Paquet.
In Toronto, former property manager Mansoor Kahn was accused by his
former condo board clients of misappropriating upwards of $20 million,
before fleeing to Bangladesh, media reports said.
In the meantime, lawyers representing condo owners in both provinces are
urging their clients to be vigilant.
“The issue of management wasn’t as big a problem until we saw the
explosive growth of condo buildings in Ontario,” said Audrey Loeb, an
attorney with Miller Thomson in Toronto. “One of the things we are
starting to see is that people in the know are buying units based on
who’s managing them.”
A year and a half after Chetboun and Remia arrived as managers at
Château Nasso, the reserve fund has grown from nothing to more than
$100,000. The marble floors now gleam and the landings are brightly lit,
a reporter observed recently.
But their greatest achievement, Boily said, was securing a “yes” vote
that December evening, after nearly two decades years of discussion,
debates and studies.
What persuaded the residents to accept the pain of a $100,000 bill was
the even higher cost of doing nothing, along with the recognition that
the work would help their undervalued properties. Despite its location
across from McGill University and spacious 1,500-square-foot apartments,
the building was in such a poor state that real-estate brokers would
deliberately avoid the Château Nasso, Boily said.
“I know some owners who sold their apartments for $350,000, or
$375,000,” Boily said. “But this doesn’t reflect the value of the
building with its prime downtown location.”
An independent inspector’s report said completing the work would
automatically raise each apartment’s value by about $80,000; Chetboun
expects they could go up by as much as $120,000.
Since that December vote, about 70 per cent of building owners have paid
the special assessment.
“For me, it was practically a dream come true,” Boily said. “After 15
years, I didn’t believe we’d ever get the work done.”
From handling disputes to insurance, change is in the air.
Current situation in Quebec
- In the case of a dispute, condo owners can seek mediation in some cases, or go to court.
- At least five per cent of a condo association’s budget must be set aside in a reserve fund.
- Condo managers do not have to be licensed and are not required to take a special course, or be part of a professional order.
- New home construction must be insured (along with customers’ deposits for up to $39,000) in all buildings up to four-units high. No warranties required for condos transformed from other buildings like churches, or in new condo buildings above four units in height.
- Recommendations from the Condo Working Group
Consider creating a “Régie de la copropriété” or condo board to provide legal information and help struggling owners. This could include a “condo court” to resolve disputes. - Spell out the condo association’s obligation to keep a reserve fund worth about one per cent of the building’s value.
- Subject condo managers to regulation through a professional order with its own indemnity fund and code of conduct.
- Make insurance mandatory for all new home construction (including customers’ deposits up to $39,000) regardless of height, or whether the condos have been converted from another building like an old factory or church.
- Allow developers to spend only those deposits that are insured until the home is delivered.
Experience in Ontario
- Certain conflicts between condo owners and their boards - such as a disagreement over noise levels - go to mediation or arbitration, while other cases go to court.
- Arbitration has proved expensive for condo owners who must pay the cost of the arbitrator, about $400 an hour.
- The amount of the reserve fund is determined by a study executed by a professional like an engineer or architect.
- No legal requirements like Quebec. But the Association of Condominium Managers of Ontario provides a voluntary certification, the ACMO 2000.
- New home construction and customers’ deposits (up to $20,000) are insured in buildings of all sizes. Before the home is delivered, developers can only spend deposits that have been insured.
- Condo buildings transformed from other structures aren’t insured.
